Question

2. A government bond currently carries a yield to maturity of 6 percent and a market price of $1,168.49. If the bond promises to pay $100 in interest annually for five years, what is its current duration?

Answer 1

Duration of bond is 4.24 years.

Step-by-step explanation:

Duration of bond = Sum of (present value of cash flow*n)/Price of bond

n = Year in which cash flow is received

Face value of bond = $1,000

Year (n) Cash flow Discount factor at 6% Present value Pv*n

1 $100.00 0.943396226 $94.34 $94.34

2 $100.00 0.88999644 $89.00 $178.00

3 $100.00 0.839619283 $83.96 $251.89

4 $100.00 0.792093663 $79.21 $316.84

5 $1,100.00 0.747258173 $821.98 $4,109.92

$1,168.49 $4,950.98

Duration of bond = 4950.98/1168.49

Duration of bond = 4.24 years